JP Morgan: China Recovery Priced In, Downgrades Yum Brands

By Shuli Ren

Ahead of the company’s earnings release tomorrow, J.P. Morgan downgrades Yum Brands, which derives most of its business from China, to Neutral with a new price target of $80.

Yum Brands did not have a good 2013, reporting declining same-store sales numbers in China month after month. But even assuming reasonable revenue growth this year and next, J.P. Morgan was only able to come up with a $80 fair price, using sum-of-the-parts analysis. Yum closed at $76.34 on Friday.

Here are analysts John Ivankoe, Amod Gautam and Jason W Price:

With little specificity offered by management on China 1Q comps (a two-month quarter including Jan/Feb only), we continue to expect 7.5%, relative to previous guidance for high single to low double digit comps for the full year and our 8.7% for F14 and 10% for F15.

The KFC restage launched in late March (2Q) may arguably be underwhelming as introduction of 15 products included 5 re-launched versions of prior offerings and 6 dessert/drinks, and no
value component.

While we are sensitive to being too conservative in our China recovery estimates, the potential effect on earnings should still be modest.

And don’t bet on India, the other populous emerging market, cautions J.P. Morgan:

Using other 15%+ EPS growth companies as a proxy, we believe Yum China/India is worth 22x or $42 per share. India represents 2% of the sub-segments revenue but is not making money. At this point we treat the division effectively as an important call option but one with fairly minimal contribution to Yum value in the next five years.

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Emerging markets have been synonymous with growth, but the outlook for individual nations is constantly changing. Countries from Brazil and Russia to Turkey face challenges including infrastructure bottlenecks, credit issues and political shifts. The Barrons.com Emerging Markets Daily blog analyzes news, data and research out of emerging markets beyond Asia to help readers navigate the investment landscape.

Barron’s veteran Dimitra DeFotis has been blogging about emerging market investing since traveling to India and Turkey. Based in New York, she previously wrote for Barron’s about U.S. equity investing, including cover stories and roundtables on energy themes. Dimitra was among the first digital journalists at the Chicago Tribune and started her career as a police reporter at the Daily Herald in the Chicago suburbs. Dimitra holds degrees from the University of Illinois and Columbia University, where she was a Knight-Bagehot Fellow in the business and journalism schools.